November 15, 2006

November 16, 2006: Canadian Royalty Trusts: Oversold?

Sometimes, the market just becomes totally inefficient in a sector. I believe that the Canadian Royalty Trusts in oil and gas are grossly oversold and should be considered for purchase for mildly speculative monies as a pure dividend play. When yields are approaching 18% or more, I took notice.

A well respected analyst in Canada reported the following with potential scenarios for the trusts in political terms:

1. Canadian tax laws are changed exactly as proposed by the Prime Minister, eliminating tax advantaged status in 2011:45% chance. This is a worst case scenario for oil and gas trusts, but still means the stocks are oversold now on a comparative basis.2. Tax laws are changed as proposed but existing energy trusts ar exempted: 45% chance. This is nirvana if you buy trusts now with their savaged price.3. Tax laws are changed as proposed for new trusts, but ALL existing trusts are exempted: 5% chance.4. Tax laws are changed as proposed but the grace period would be extended past 2011:45% chance.